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A proposed Optional Federal Charter (OFC) would give insurance agents and companies the choice of either being regulated by the federal government or remaining under the current state system. While an OFC could simplify business for agents doing business in multiple states, it would also create a potentially burdensome federal regulator.
NAIFA Trustee Russ Smith, CLU, ChFC, CFP, CSA, and Director of Federal Relations Jill Edwards discuss the pros and cons of this controversial initiative and explain how an OFC could affect your bottom line. _____________________________________________________
AM = ANDY MOYER; JE = JILL EDWARDS; RS = RUSS SMITH
AM: Welcome to NAIFA’s GovPod, the podcast about important legislative issues affecting the insurance and financial services industry. I’m Andy Moyer, communications producer for NAIFA, and today I’m joined by Jill Edwards, director of federal government relations at NAIFA, and Russ Smith, a member of the NAIFA Board of Trustees. We’ll be discussing the Optional Federal Charter or OFC. Simply put, the OFC is a legislative initiative that would allow life and property casualty insurers and agents to choose to be regulated by a single federal entity or remain under the state system.
This is perhaps the most controversial issue facing the insurance industry and, as NAIFA members, it is important for you to better understand the impact an OFC could have on your bottom line. Jill, Russ, thanks for being here today on our podcast.
JE: Thank you for having us.
RS: Thanks, Andy.
AM: Jill, can you start by giving us some details about the OFC and specifically how it’s become such an important issue?
JE: Happy to. Thank you, Andy. Basically, the Optional Federal Charter is just what you stated. It is a legislative initiative that would allow property casualty agents and life agents and companies to choose whether or not they would remain as state regulated or move to a single federal system. It’s a very controversial issue, as you said, because, obviously, the insurance industry has been regulated by the states forever, about 135 years, and it was reaffirmed in 1945 with the McCarran-Ferguson Act.
But since passage of the Gramm-Leach-Blily Financial Services Modernization Act in 1999, many would argue that the insurance industry was not modernized and we’re still operating by an antiquated system where you have to have 50 different state regulators and 50 different insurance commissioners all have to agree to get anything done. And it’s really slowed the progress of our industry and everyone agrees, including the insurance commissioners and legislators, that something needs to be done.
And the Optional Federal Charter is one of those options, but it is controversial.
AM: So, Russ, where does NAIFA stand on the creation of an OFC?
RS: Well, NAIFA has forever, as Jill indicated, supported the state regulation of the insurance industry, but there are significant deficiencies and, therefore, NAIFA is open to considering any and all regulatory options that will ease those deficiencies, most notably the speed-to-market issue and the licensing issue.
AM: Okay, but many NAIFA members who are licensed for securities tell horror stories about dealing with the Securities and Exchange Commission and FINRA. Why should we expect federal regulation to be any different under an OFC?
JE: Well, first of all, many people who are listening might be wondering what is FINRA? FINRA is a new entity that came about in July of this year when the now former NASD and the New York Stock Exchange merged. As far as the comments that we have heard from NAIFA members in dealing with the NASD and now FINRA, there is a legitimate argument that part of the problem is that FINRA and the SEC, they don’t understand the unique relationship between insurance and securities.
And FINRA, really, is looking at things from just the securities side because there is no federal entity for insurance. One of the opportunities under the Optional Federal Charter… And I say opportunity because those who are securities licensed, they will continue to be regulated by the SEC and FINRA. But under the Optional Federal Charter there is an opportunity to get the FINRA piece out of it and to create a new self-regulatory organization that recognizes the unique relationship between these insurance/ securities products, these hybrid products.
And I know a lot of our members who sell those products have seen a lot of the bad press. Well, perhaps a lot of the bad press has come about because of poor regulation. And this is an opportunity to perhaps correct those regulatory problems.
AM: Russ, are there other potential benefits for agents or would an OFC really be most beneficial to companies?
RS: Andy, I think the benefits are across the board. Yes, the company certain benefit, but the big benefits to agencies and entrepreneurs that run small agencies is the licensing issue. Right now if you do business in multiple states, you have to apply for a license in those states. Each state might have its own continuing education requirement, etc., and it just becomes very tedious. I personally am licensed in about 25 states and having to go through all of the issues involved with that, it’s crazy.
If we had just one license that would allow us to do business in all 50 states, that would just be so much better. Now the negative side to that is what’s the cost gonna be? It could be large but I think it would still be less than what the cost is of paying 25 different states. Additionally, the speed-to-market issue products… Right now products get bogged down in the approval process in many states, California, notably. It takes forever to get a product to market.
And that affects not only me but it affects my clients as well. If there’s a good product out there that’s available in Arizona but it’s not available in California, that puts me at an extreme disadvantage. If there were a single clearinghouse for product and once approved it was available for sale in all states, I think that benefits—yes, it benefits the companies but it definitely benefits the agents.
JE: And if I could just add to what Russ said, you know, we’ve said that this was about the property casualty and the life side of the business on both the company and the agent side, and not health. Healthcare has largely been out of this debate. If you were an agent and you’re multiline, you can choose to be a nationally licensed agent, but if you’re selling for a company, including health insurance, you can sell all over the country. And just depending on which company you’re selling for, you can sell in whatever states that they’re licensed to do business in.
AM: Okay, so how would an OFC affect consumers? Jill, you wanna pick that up?
JE: Sure. Basically, there are some potential downsides for the consumers. One of the big issues, I think, in the insurance industry is the claims, especially on the property casualty side. And I’m sure many of our members who are multi-line have dealt with that. And so having that relationship with your state regulator, obviously, might be more beneficial than having to deal with some regulator in Washington. And one of the proposals out there calls for consumer—there’s like six consumer call centers throughout the country just sort of address that issue.
And how well that would work, really, would remain to be seen. That’s one of the potential problems of the proposal. Now on the flip side of that, there also has been a lot of testimony before Congress that the current system has not been efficient to consumers because it offers them less product choice. I mean, some products that are available in California but not necessarily available in Nevada, a neighboring state. And it really does sort of limit consumer product choice when you don’t have that speed-to-market that the Optional Federal Charter really would create.
It’s been determined that there are billions of dollars in compliance costs that the companies and agents are having to incur because when you have 50 different regulators, actually, it’s 50 plus when you consider the District of Columbia and the territories… And so what this would do is—potentially is to reduce those regulatory costs for the companies that choose to go to a federal regulator, or the agents that choose to go to a federal regulator. And, ultimately, those costs will perceivably be passed down to the consumer.
AM: So what are the prospects of an OFC being enacted?
JE: NAIFA, first of all, has worked incredibly closely with the states, specifically with the National Conference of Insurance Legislators, with the National Association of Insurance Commissioners in trying to address this issue, and we will continue to do so. But the reality is (and regulators are usually—you know, they usually agree with this), to get it—totally uniformity is a very tall order because you have to get 50 insurance commissioners and 50 state regulators with all those bodies to agree on one thing at a time.
It’s a very slow process. And when you look at the state’s track record, it isn’t very good but there have been significant improvements. For instance, the Interstate Compact, it did not really take off until there was a threat of an Optional Federal Charter. So the simple threat of federal intervention is causing the states to act, and so that is the benefit of this discussion.
Now in Congress there have been proposals offered in both the House and the Senate. They’re similar. They’re called the “National Insurance Act” that would—is, basically, the Optional Federal Charter Bills. And they—there have been hearings in the House. Actually, there’s been two. As of late we’ve been reporting on those in Frontline and in Advocacy updates. The Senate has been a little slower but there is—they have intentions to hold hearings this Congress. But there's sort of momentum building.
And one of the really interesting developments is this year Senator Charles Schumer of New York and Mayor Bloomberg of New York issued what’s called the Schumer-Bloomberg Report on capital markets and financial institutions in the United States, obviously, New York being the country’s financial center. And one of the things that came out of that report is that the current insurance regulatory structure being broken and being deficient and being slow to respond to the modern marketplace has really hurting the financial markets.
And they now—and that report said that the Optional Federal Charter is potentially necessary. The U.S. Department of Treasury has now recently received comments on this very issue. NAIFA provided our comments and they’re available on our website. So the bottom line is that this is a lot bigger than just insurance agents and just insurance companies; this is about the economy. So there are a lot of factors in play here and so, obviously, NAIFA’s gonna be representing the agent interest and the life insurance agent interest in particular as this moved forward.
But those listening need to recognize that this is a big monster. It’s not gonna happen overnight, it’s probably not gonna happen this Congress, but the momentum is definitely growing.
AM: Okay, Russ, while you’re out in the field and in a number of states, why is this issue important to NAIFA members?
RS: I think Jill hit many of the high points but, you know, the reality is that reform is inevitable. There is no two ways about it. Whether it takes the form of the Optional Federal Charter or whether we enhance the Interstate Compact it’s inevitable. The two big pluses, as I see it, are the speed-to-market issue regarding product and the licensing issue. I would like to just have one license in order to do business in multiple states.
And the fact that the Optional Federal Charter is, indeed, optional shouldn’t be worrisome to somebody who’s just doing business in one state because they can opt in or opt out either way. But we need to be in the discussion as to what form this reform is going to take. The negative that I see, quite frankly, is the federal regulator. That’s been problematic. If you’ve got a good state insurance commissioner and you wanna continue to work with him, you know, why would you opt for the federal regulator?
But the reality is reform is inevitable. We are going to have to embrace something. I think two out of three of the issues are good with the Optional Federal Charter but it’s very early in the process. We’re not sure exactly what it’s gonna look like when it’s all done, but we need a place at the bargaining table, if you will. So stay tuned. This is very, very important.
AM: Excellent. Finally, how can NAIFA members learn more about the OFC and keep current on legislative developments? Russ, you wanna take this?
RS: Yes. Thanks, Andy. Several areas. One, we have a Program-in-a-Box, number 21, that is available on the Leaders’ Training Center. Additionally, there’s an insurance regulatory reform section on the NAIFA website and the NAIFA website is www.naifa.org. And then also the new gov e-mail communications that’s being launched in January 2008 will keep everybody informed on a regular basis.
AM: Thank you, Russ. Jill, Russ, thank you for being here on our podcast today.
JE: And thank you for having me.
RS: Thanks, Andy.
AM: For more information on this and other govpods, please visit the NAIFA website at www.naifa.org/advocacy.
Membership in NAIFA is all about your success. We give you the tools you need to grow your business and propel your career as an insurance or financial advisor. Learn more about becoming a NAIFA member and join today at www.naifa.org/join. This 2008 podcast is a copyrighted production of the National Association of Insurance and Financial Advisors. All rights are reserved.
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